Family and financial advisor
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Banking decisions aren’t always front and center in wealth planning, but they should be part of the conversation.
Family wealth plans are typically focused on long-term investments or complex tax strategies. Banking solutions don’t often get a lot of attention, but it is important when viewing both sides of the balance sheet and how lending and deposits can preserve and expand wealth. Day-to-day cash management is woven into our daily activities, and utilizing leverage and the appropriate credit and interest rate structures can provide options to individuals and families when transitioning wealth from one generation to the next.
When does it make sense to use private banking services for these solutions? Here are some situations where families can use banking techniques to address immediate needs while benefiting their long-term wealth planning.
Should I borrow from a bank to pursue growth?
Building wealth often means borrowing funds up front to fund a potentially significant opportunity. For most families, that means a bank loan, and the risks (and costs) associated with it. Debt can be impactful in the right situations, but as anyone who experienced the 2008/2009 financial crisis can tell you, debt can have its downfalls.
How do you balance the potential gains against the risks? The cost of the interest is what matters most. When rates are low, debt can help you acquire assets that you may need now. It can also help bridge the gap between anticipated liquidity events. For example, perhaps you need liquidity to pay income taxes, but you don’t want to disturb your investment strategy. You may be able to borrow against your portfolio and fulfill the liquidity need without incurring capital gains and generating more taxes.
What about a mortgage?
Taking out a mortgage on a house or property can seem unwise to families with wealth. Why pay interest on a loan if you can buy the property outright? But in many cases, mortgages offer practical advantages. For instance, they can spare you from having to liquidate other assets to gather cash for the purchase. The modest interest on a low-rate mortgage loan will often cost much less than the tax hit from selling a highly appreciated asset. Also, the payments of interest on the mortgage may produce an income tax deduction. However, you will want to check with your CPA or tax advisor regarding your specific situation.
More importantly, a mortgage can enhance your long-term wealth if the interest rate is low enough. When low-cost loan proceeds are used to purchase an asset that appreciates at a higher rate than the interest, …….
